Saturday, September 10, 2011

Self-Incorporating a Tech Startup

This is in response to my friend Ben's recent post, What about money for a lawyer?

I spent a bit of time last month self-incorporating my tech startup and since this topic is very fresh on my mind, I thought I'd reflect on it for a moment.

The first thing I'd like to reflect on is the actual decision about whether or not to do this myself or hire a lawyer. The decision here comes down to deciding whether or not the additional $1,200-$1,500 in fees is worth the peace of mind that your company is starting off on the right foot in the legal department. Since I am confident that I know what I'm doing and have free resources to monitor I'm not doing anything dumb, the decision to by-pass hiring an attorney was an easy one. And I believe any competent entrepreneur can do the same, if they are willing to give up some time and energy to educate themselves. The trick is to get to the point where you can be confident that you are doing it right without missing any steps. So that's what I'll focus on here.

To figure out what all goes into forming your company, there are more than enough free, reliable, online resources to help educate you. Just use google to find legal articles on this stuff, and then study wikipedia to make sure you understand all of the legal terminology.  A few good blogs for learning about this stuff are Startuplawyer, TechnologyStartupLaw, Startup Company Lawyer, Brad Feld's Blog, and of course the MBA Monday's series on AVC. From reading these sites as well as learning from Quora and Stack Exchange's Onstartups, it was clear to me exactly what details I wanted to bake into incorporating my company. I won't talk about legal specifics here, and I'll just talk about how I learned enough to incorporate everything myself.

So knowing all of the details about type of entity, state of incorporation, par value, vesting agreements, IP rights, etc, is a good start, but the more intimidating part is actually going about drafting and filing the appropriate legal documents to put everything in place. The best way to do this, if possible, is to use free resources to legal assistance. You'd be shocked at how many people out there really want to help you. Two good options for this are:
  1. Free legal clinics. Tons of Universities with Law Schools have these now, and they are aimed at giving law students real world practice with startup law while being supervised by professionals. In Chicago, the top three are the program at Northwestern University, the Institute for Justice Clinic, and the Loyola Law Clinic. A lot of these will have long wait times, so if it's not urgent these could be a great free source of help.
  2. Small Business Development Centers (SBDCs). These will often give you general business advice for free, and have connections to pro-bono legal help or Certified Public Accountants (CPAs) who are plenty knowledgeable about simple legal issues. I went into the SBDC at UIC and was happy to get a lot of help from them. In fact, I still email the CPA now and then if I have a quick question and he always sends me back a clear response in an hour or two.
Once these two options for getting help with filing your documents have been explored, it is worth also checking with lawyers to make sure you are doing this right. Lawyers will all give you a free consultation half an hour or so to learn more about you and attempt to woo you into signing with their practice. I talked on the phone with about 8 lawyers for 30 minutes each, about setting up my corporate entity and drafting other legal documents. At first, I was embarrassed to say I was thinking about incorporating on my own without their help because I thought they would call me naive or say I shouldn't do it. But after the 2nd interview, I realized that these lawyers were actually enthusiastic about the idea of me saving money for my company upfront and they were more than helpful to me in hopes that I would sign on with them when I had "real" legal needs that needed to be addressed such as raising a round of capital. These lawyers would all give me lists of legal documents I needed to file, tips on how to file them and what I should incorporate on them, and told me about any pitfalls or things to watch out for (such as making sure I file my 83(b) within 30 days of incorporation). They assured me that internal documents such as company by-laws can be amended later when you need to, so getting it perfect the first time will not make or break your company. Further, one lawyer even offered to inspect my documents for free after I drafted them to ensure I was doing things right.

So I guess what I learned is that incorporating a business is not hard, and you can learn everything you need by just using Google, calling people, and asking the right questions. Since in my situation I have a lot of time but not a lot of money, this made sense. While all of this information was a bit overwhelming at first, I now feel infinitely more confident with my business since I know the ins and outs of my company's legal structure.